Not all growth is quality growth. A company may be growing its revenue, but not its free cash flow. A company may be growing free cash flow, but be doing so by taking on a lot of debt. A company may be growing its free cash flow by investing at high returns on capital, but lack the resilience to competition and economic cycles that would ensure growth can continue into the future. A company may be highly resilient, but be operating in a declining market, meaning there’s uncertainty as to whether growth will continue.

A quality growth company grows both its revenue and its free cash flow, it does so by reinvesting profits at high returns on capital and has the resilience and the market to continue growing for years to come. Such companies represent only a tiny segment of the equity market.

Long Equity runs a single, concentrated, quality growth investment strategy consisting of value-creating and price-setting global companies. We only hold companies that can: (i) invest their capital at significantly higher returns than their cost of capital (value creation); and (ii) raise their prices without impacting demand (price setting). Their returns on capital must be high, consistent and unleveraged, with competitive advantages, ideally switching costs and network effects, preventing high returns from being competed away. We pursue a long-term strategy that aims to minimise transaction costs and defer capital gains by only investing in companies capable of compounding value indefinitely.

Short-term market volatility is inherent to equities. We think risk is best controlled through the selection of high quality stocks, not financial engineering (i.e. hedging/shorting). We select companies that aren’t susceptible to competitive threats, macroeconomic events and political and regulatory risk. We avoid companies with weak and highly-leveraged balance sheets. We avoid speculative investments, such as companies lacking a track record or going through a restructuring. We avoid speculative asset classes, such as currencies, commodities and derivatives. We also maintain a liquid portfolio, so that we can quickly sell out of a position if a company’s circumstances change or if there is high market volatility.

To ensure diversification we invest across a variety of sectors and industries (e.g. payment services, credit rating & scores, semiconductors, software and healthcare). Other sectors are too cyclical and capital intensive. The companies we invest in mostly have exposure to both developed and emerging markets, and therefore the fund is globally diversified despite only holding developed market stocks. We avoid individual positions taking up less than 2% of the portfolio, allowing each investment to make a meaningful impact on performance.

We only value earnings that represent a high return on capital, have a predictable source of growth, demonstrate low cyclicality, arrive in cash and do not require high leverage to generate.

We then compare what we forecast the company’s future free cash flow per share will be with its current share price (the forward FCF yield). We then compare the valuation with those of other equally high-quality companies, to ensure we pinpoint the best opportunities.

Long Equity is currently private and closed to new investment. We hope to formally launch in the near future, initially through operating Separately Managed Accounts (SMA), before possibly utilising the partnership model.